This country-specific Q&A provides an overview of Restructuring & Insolvency laws and regulations applicable in Denmark.
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
In Denmark the three forms of security that may be granted over immovable property listed below are those most widely used:
The mortgage is typically issued by a creditor or a credit institution where a property is mortgaged with the payment of a specific amount in favour of the creditor/credit institution for a loan. The debtor will typically service the debt.
The indemnity bond is a mortgage where the debtor’s property is mortgaged with the payment of a maximum sum in favour of a specific creditor in respect of a loan in respect of which the final amount owed has not yet been fixed. The indemnity bond is typically provided by the debtor as security for an overdraft facility.
An owner’s mortgage is a mortgage where the debtor reserves a mortgage of a fixed amount on its immovable property and provides this as security for an
underlying debt owed to the creditor, if the underlying debt is repaid, the owner’s mortgage may serve as security for new debt.
As a starting point, security granted over movable property depends on the type of movable property. The most widely used types of security over movable property are:
Company charge means that the debtor grants a charge in favour of the creditor over, for instance, the inventory at any time, operating equipment, goodwill and amounts owing from the sale of goods and services. The company charge is a type of a floating charge that does not prevent those assets under the charge is separated from the debtor’s business during operations.
Receivables charge means that the debtor provides security in favour of the creditor over receivables from the sale of goods and services. The debtor’s receivables become included in the receivables charge as they are created and deleted from the charge as they are repaid.
The chattel mortgage may be created on a specific chattel, for instance, a car or a machine. For traders that carry on their business activities from leased premises chattel mortgages may be created on the operating plant and operating equipment situated at the business’s address without any separate specification.
charges on rights
By agreement, charges may be created on rights, for instance, amounts owing, instruments of debt, shares, securities etc.
A pledge may be granted over assets in respect of which the security in favour of the creditor is created by the transfer of physical assets to the creditor.
It is a characteristic of the above types of security model – except from the last two – that the creditor must register the security. If the creditor does not have the security registered, the creditor will not be protected against the debtor’s other creditors or assignees in good faith but only rely on the charge agreement between the parties.
In respect of a charge on rights, the security is established by information to the issuer of the right in question.
In respect of a pledge, the creditor’s security is established by physical dispossession of the pledged assets.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
In respect of a mortgage secured on the debtor’s immovable property, the creditor may commence a forced sale procedure before the enforcement court of the debtor’s jurisdiction if the debtor defaults on the debt. However, it is a condition that the creditor levies execution on the debtor’s immovable property and subsequently the creditor may file a request for a forced sale with the enforcement court of the debtor’s jurisdiction.
In case of a charge on movable property, it is also possible for the creditor to request that execution be levied on the charged item. Based on the execution the creditor may dispossess the item as security for the creditor’s agreement with the debtor and the creditor may sell the item in question for the purpose of covering the arrears. The creditor’s request for execution may also be filed with the enforcement court of the debtor’s jurisdiction.
Recovery through the enforcement court assumes that the creditor has obtained a basis for the recovery, for instance a judgment, instrument of debt, settlement etc.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
Under Danish law, the test for insolvency for the debtor’s insolvency is whether the debtor is able to fulfil its obligation as they fall due. If the debtor cannot do this, it isassumed that the debtor is insolvent, unless the inability to pay is temporary.
Individuals are not obliged to file their own petition.
Under Danish law, the management of a distressed company (the debtor) is not obliged to file a petition in bankruptcy. Under the Danish Companies Act, the management of a company must ensure that the debtor’s capital reserves are sufficient at any time so that the debtor is able to fulfil its present and future obligations as they fall due.
As a starting point, the management of a company does not incur liability if insolvency proceedings are commenced against the debtor. However, the trustee or a third party may raise a claim for civil management liability or criminal management liability against the management if it is discovered that the management has carried out transactions in a manner that has contributed decisively to the debtor’s insolvency or if the operation has continued after the time at which the management could establish that further operation was to no avail.
The trustee may also institute disqualification proceedings against the management. If the management is disqualified, the management must not participate in the management of a limited liability company without being personally liable for the company’s obligations.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
What insolvency procedures are available in the jurisdiction?
There are two types of in-court insolvency procedures in Denmark; restructuring and insolvency.
The purpose of restructuring is to obtain an arrangement with the creditors, transfer a business or a combination or wind down operations in cooperation with the former management.
The purpose of an insolvency procedure is to sell the debtor’s assets with a view to distributing the seller’s assets between the creditors.
Does management continue to operate the business and / or is the debtor subject to supervision?
In respect of restructuring proceedings, the management continues to operate the business together with a restructuring administrator appointed by the insolvency court. The management must not make important decisions without the consent of the restructuring administrator.
In certain circumstances, the restructuring administrator may take over the management.
When the insolvency order has been issued, the management is deregistered and subsequently the trustee takes over the management of the business.
What roles do the court and other stakeholders play?
In restructuring proceedings, the proposed solution must be presented to the creditors for their approval. If the proposed solution is not accepted by the creditors, insolvency proceedings will be commenced against the debtor.
In insolvency proceedings, the trustee has the full decision-making power and may consequently deal with the assets of the estate without the consent of the creditors.
In respect of restructuring proceedings as well as insolvency proceedings, the insolvency court is the supreme authority and is not to approve transactions but is only to ensure that the administration is in accordance with the Danish Insolvency Act.
How long does the process usually take to complete?
A restructuring process may take up to 12 months at which time a restructuring proposal is to be voted on. The restructuring administration usually takes 2-6 months.
There is no specific timeframe for the administration of an insolvent estate but it is typically 1-2 year. In case of particularly complicated estates or if legal proceedings are conducted, the administration may take considerably longer.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
The order of priority of the creditors is governed by the Danish Insolvency Act.
According to the order of priority, costs and fees related to the administration of the estate are covered first.
Next costs related to a vain restructuring attempt or vain attempts at an overall arrangement with the debtor’s creditors prior to the insolvency are covered.
Employees’ claims are covered next.
Next claims are covered that concern duty on goods that are subject to duty, e.g. alcoholic and tobacco goods.
Next, the unsecured creditors are covered, e.g. an ordinary receivable based on an invoice, tax and VAT claims etc.
Finally, claims for interest after the issue of the insolvency order, gifts and fines are covered.
Creditors that hold a charge or another type of security over the debtor’s assets are covered separately as the proceeds from the sale of the charged asset go directly to the secured creditor.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
On certain conditions, the debtor’s pre-insolvency transactions may be avoided by the insolvent estate. Avoidance means that an otherwise valid transaction made by the debtor is reversed if the transaction in question has defeated the assets of the estate or increased the debtor’s debt.
If the trustee believes that that debtor’s actions are contrary to the avoidance rules of the Danish Insolvency Act, the insolvent estate must no later than 12 months from the issue of the insolvency order institute legal proceedings against
the third party or creditor that was given preference by the debtor’s voidable transaction.
The debtor’s voidable transactions under the Danish Insolvency Act include:
gifts from the debtor;
payment of debt,
transactions giving preference to a creditor over the other creditors;
transactions that mean that the debtor’s assets avoid being included in the assets of the insolvent estate; and
transactions that mean that the debtor’s debt increases.
If the trustee is successful in the claim for avoidance against a third party, the third party must give up and return the preference to the insolvent estate that he has obtained through the debtor’s voidable transaction, but not more than the loss of the estate.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
Under Danish insolvency law, a moratorium may only be agreed voluntarily between a debtor and the debtor’s creditors or as part of restructuring proceedings filed for or completed. As long as restructuring or bankruptcy proceedings filed for are pending, unsecured creditors are also barred from pursuing their claims.
A moratorium does not release the debtor from payment of the debt but for as long as the moratorium is maintained, the creditors cannot levy execution against the debtor or file a petition in bankruptcy against the debtor.
As a result of the circumstance that it cannot be requested that a Danish bankruptcy order be acknowledged abroad (with the exception of the Nordic countries) a moratorium only has exterritorial effect in connection with bankruptcy and restructuring proceedings if the country of the foreign creditor acknowledges the Danish insolvency proceedings. The reason for this is that Denmark has not yet acceded to the Insolvency Regulation of the EU. However,it must be mentioned that several countries will acknowledge Danish bankruptcy/restructuring proceedings in accordance with UNCITRAL’s model law on cross border insolvency.
In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
The starting point of a voluntary arrangement in respect of an extension of payments (moratorium) is, as stated above, that the participatingcreditors are barred from seeking satisfaction in the debtor’s assets by means of individual creditor action, but this is to be agreed individually in each arrangement.
If the moratorium is agreed as part of restructuring proceedings filed for or completed, the starting point is that the creditors are barred from pursuing their claims irrespective of whether they wish to participate or not.
However, there are some exceptions to the above starting point, which will be outlined below.
Creditors that have levied execution against claims before the commencement of the restructuring proceedings (in practice the rule is relevant for execution levied no later than three months prior to the reference date) may exercise dispossession and seek satisfaction on the basis of the charge on the claims in question, see section 12c(2) of the Danish Bankruptcy Act.
In restructuring proceedings filed for creditors that have a lien on the debtor’s property until a specific amount has been paid have a right to levy execution against the liened property and seek satisfaction in such property, see section 12c(3) of the Danish Bankruptcy Act. Furthermore, creditors whose claimsare secured by a pledge, a floating charge on claims or receivables charge may seek satisfaction in the charged assets, see section 12c(4) of the Danish Bankruptcy Act.
Under section 12c(5) of the Bankruptcy Act, a debtor must on request from a creditor pay the periodical payments on a claim secured by a charge that concern the period of time after the commencement of the restructuring proceedings. If the debtor fails to make payment in due time, the creditor may seek satisfaction in the asset charged irrespective of the general prohibition against individual creditor action.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
Restructuring may be applied to individuals and businesses. In-court restructuring against a debtor may only commence if the debtor is insolvent and if the debtor or creditor requests that the insolvency court commence such proceedings.
It is a condition of in-court restructuring that the restructuring proposal includes a compulsory arrangement with the creditors and/or a transfer of the business.
In case of in-court restructuring, the insolvency court will appoint a restructuring administrator (typically an attorney) and a restructuring accountant for the debtor.
The restructuring administrator presents the restructuring proposal to the creditors that vote on the approval of the restructuring proposal. If the restructuring proposal is not approved, insolvency proceedings will commence against the debtor. As a starting point, the proposal will be approved if not more than 50% of the creditors present at the meeting disapprove of the proposal.
The management of the debtor continues as a starting point if the creditors or the insolvency court do not decide otherwise. The management must not make important decisions without the consent of the restructuring administrator.
The insolvency court is only a supreme authority and is not to approve transactions but only to ensure that the administration takes place in accordance with the Insolvency Act.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
A debtor in restructuring proceedings is not prevented from obtaining new financing.
A creditor does not automatically become better secured but he may be if a proposal to this effect is made in a restructuring proposal that is approval. The claim may also rank second in the order of priority in subsequent insolvency proceedings if the financing is obtained with the consent of the restructuring administrator officer.
Public loans obtained for the financing of employees’ salaries in the restructuring period will automatically rank second in the order of priority in any subsequent insolvency proceedings.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
Restructuring proceedings cannot release claims against non-debtor parties.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities do they have? Are they permitted to retain advisers and, if so, how are they funded?
Under Danish law, creditor committees cannot be formed in restructuring proceedings only in bankruptcy proceedings. In practice, however, it is not usual that a creditor committee is formed in bankruptcy proceedings.
If a creditor committee is formed, the creditors will be permitted to be represented by an attorney. However, it is only the appointed members of the creditor committee who may be paid by the estate in bankruptcy. Expenses for the members’ own advisors will as the predominant main rule not be paid by the estate in bankruptcy.
The trustee does not require the consent of the creditor committee in order to make transactions but the trustee must inform the creditor committee prior to material decisions. Non-compliance with the duty to inform may result in a complaint from the bankruptcy court and possibly the appointment of a new trustee. The creditor committee does not have the authority to make decisions.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?
Contracts in restructuring processes
With the consent of the restructuring administrator, the debtor may as a starting point continue contracts/bilateral contracts entered into. The debtor may also terminate the contracts with the consent of the restructuring administrator which is usually also the case for non-terminable contracts unless the non-terminability is secured by registration.
In restructuring proceedings, contracts are treated under the same rules as contracts in insolvency proceedings so please see the section on such contracts.
It is noted that the debtor cannot continue the contract without the consent of the other contracting party if except from the restructuring proceedings the other contracting party was entitled to terminate the contract without notice for other reasons that debtor’s delay in the contractual payment.
In restructuring proceedings, the debtor may in certain circumstances continue agreement than the other contracting party had terminated without notice no later than 4 weeks prior to the restructuring.
If the creditors approve a restructuring proposal that includes a transfer of business, the contracts may in certain cases be transferred to the buyer without the consent of the other contracting party.
Contracts in insolvency proceedings
The insolvent estate may decide to let the insolvent estate adopt the contract or not. Consequently, it cannot be effectively agreed in advance that insolvency or restructuring proceedings means that the agreement be terminated without notice. The other contracting party may require that the insolvent estate decides on the adoption of a contract without undue delay.
If the insolvent estate does not adopt the contract, the other contracting party may as a starting point terminate the agreement without notice and claim damages for its loss suffered by the non-performance of the contract.
If the insolvent estate adopts the contract, the insolvent estate assumes the rights and obligations under the terms of the contract
The maintenance of retention of title in restructuring and insolvency proceedings requires that the retention of title is valid prior to the commencement of the restructuring proceedings or the issue of the insolvency order. Right of set-off may as a starting point be maintained but it is governed by the Danish Insolvency Act.
If the insolvent estate adopts the contract, the other contracting party may only terminate the contract without notice if the insolvent estate is in breach of its contractual obligations unless the other contracting party could terminate without notice based on the general rules of Danish law of obligations.
However, even though the insolvent estate has adopted the contract, the insolvent estate is always entitled to terminate the contract by giving a month’s notice if the contract concerns the delivery of an on-going service.
What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
In restructuring as well as insolvency proceedings transfer of individual assets and entire businesses may take place.
In restructuring proceedings, the entire business or part of such business is sold based on a restructuring proposal made by the restructuring administrator. The proposal must be approved by the creditors.
The transfer typically takes place free of claims and liabilities, but the final terms depend on the restructuring proposal.
When insolvent estates sell assets together or one by one, such assets will as the predominant main rule be transferred without any liability for the insolvent estate or the trustee and any buyer must consequently take over the asset as is.
In insolvency proceedings, the trustee is not obliged to ask the creditors unless the assets transferred are charged.
If the assets are charged, the creditor must accept the transfer unless the sale is a forced sale.
If employees are transferred as part of a transfer of the entire business, the buyer takes over the employees’ employment contracts, including the terms of the employment contract and any due payments.
Credit bidding is allowed under Danish law, but it requires that the chargee outbids the other bidders in respect of the charged asset.
Legislation on pre-packed sales has not been passed in Denmark.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
The board of directors and the executive board (the ”management”) of a business that suffer from cash unavailability must pay particular attention to the so-called ”time of no avail”.
The time of no avail cannot be fixed in advance but it defines the time at which the management ought to have realised that the business could not continue operations properly without any further losses for the creditors.
If the management continues operations beyond the time of no avail, the trustee of the subsequent insolvent estate and creditors that believe that operation beyond the time of no avail has caused losses for the business and/or the creditors may at a later time raise a claim for damages against the former management.
If the business has passed the time of no avail, the management is also obliged to ensure that payment of creditors in an insolvent business takes place in a manner that complies with the ranking of creditors so that some creditors are not given preference over others.
In addition, the management must ensure that the business fulfils the general bookkeeping and tax obligations as these factors are decisive in a later assessment of any management liability.
The management may incur liability, see above, but may also be disqualified by the insolvency court if up to the insolvency the management has not fulfilled its management obligations. Disqualification means that each management member cannot participate in the management of a limited liability company without being personally liable for claims against the company.
Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
The executive board and shareholders may incur liability if decisions made results in losses for the company or a third party. The executive must have acted intentionally or negligently in order to incur liability for the loss that the decisions have caused the company or a third party.
The assessment of liability is more severe in case of shareholders as the shareholder must have acted with gross negligence in order for him to incur liability for the loss that the company, other shareholders or a third party has suffered. This is consequently an exception to the rule that as a starting point the shareholder cannot incur liability.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
No, neither restructuring nor insolvency proceedings release the management or the shareholders from liability for decisions made prior to the restructuring or insolvency proceedings if the decisions in question intentionally or (grossly) negligently caused a loss for the company, shareholders or a third party, see the reply to question above regarding “Liabilities of directors and others”.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
As a result of Denmark’s opt-out of the EU rules on justice and home affairs, Denmark is outside the Insolvency Directive that concerns mutual recognition of insolvencies in the EU.
However, Denmark recognises based on Directive 2001/24EF and 2009/24EF insolvencies over credit institutions and insurance companies if insolvencies proceedings have been commenced in another EU Member State.
In addition to the above EU directives no express rules apply on recognition of foreign restructuring of insolvency proceedings in Denmark with the exception of the Nordic Bankruptcy Convention, see below.
The Danish Minister of Justice may lay down guidelines for recognition of foreign insolvencies proceedings in Denmark, but so far, the Minister of Justice has not used this power. In case law it is consequently assumed that as long as the Minister of Justice has not laid down guidelines for the recognition of foreign insolvency proceedings, foreign insolvency proceedings do not prevent other creditors from individual creditor action in respect of the debtor’s assets in action.
However, Denmark has acceded to the Nordic Bankruptcy Convention together with Norway, Sweden, Finland and Iceland according to which insolvency or restructuring proceedings against a debtor in one of the Nordic countries mean that the debtor’s assets in the home country of the debtor and in the other Nordic countries are also covered by the insolvency or restructuring proceedings.
Based on the Nordic Bankruptcy Convention the insolvency courts in Denmark will consequently recognise insolvency or restructuring proceedings from the other Nordic countries.
Has the UNCITRAL Model Law on Cross Border Insolvencyor the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
The UNCITRAL Model Law on Cross Border Insolvencyand the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments has not been adopted in Denmark and they are not under consideration in Denmark.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
If the debtor’s business activities are carried out outside Denmark, insolvency proceedings may only be commenced against the debtor if the debtor’s local court is in Denmark.
If the debtor’s local court is not in Denmark, but the debtor carries out the business activities through a subsidiary in Denmark, insolvency proceedings may be commenced in Denmark against the subsidiary in question. This will most likely apply to branches if the branch is registered as having a share capital and limited liability.
Please note that if the debtor is subject to restructuring proceedings, insolvency proceeding may be commenced against the debtor in Denmark at the conclusion of the restructuring proceedings even though the debtor no longer carries on a business in Denmark or the debtor’s local court is no longer in Denmark.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
When insolvency proceedings commence against a company, it is treated as an independent legal entity. This means that the remaining part of a group is not affected by the insolvency.
If restructuring or proceedings are commenced against more companies of the same group, it will often be the same trustee or restructuring administrator who administers the estates.
Group companies are not entitled to vote in restructuring proceedings.
Is it a debtor or creditor friendly jurisdiction?
Generally, Denmark is a creditor friendly jurisdiction as restructuring and insolvency proceedings may be commenced at the petition of a creditor.
As a starting point, the debtor cannot avoid the restructuring or insolvency proceedings if the creditor is able to prove that the conditions have been fulfilled.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
Generally, the opinion in Denmark is that employees are not to be affected by the employer’s unsuccessful restructuring and subsequent insolvency and consequently the employees’ back pay will prior to the insolvency as well as during the subsequent notice period be secured by the Employees’ Guarantee Fund.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
The greatest barriers to successful in-court restructuring is funding and speed because the appointed restructuring administrator and the appointed restructuring accountant must not have advised the company before. Such persons must also quickly familiarize themselves with the company’s affairs and submit statements and restructuring plans to the creditors.
This results in costly administration even in small-scale restructurings.
In addition, there are limited possibilities for obtaining funding for employees’ salaries during an in-court restructuring.
In insolvencies, there is often a conflict between company charge holders which hold a charge on the majority of the company’s assets and the financial obligations that to a buyer of a company mean that the employees are entitled to have their employment transferred to a buyer of the business. This may lead to inexpedient termination of employees because it is not possible to set off the employee obligations transferred against the purchase price of the charged assets.
Transfers prior to an in-court restructuring or insolvency come with substantial liability for the management and advisors and it is subsequently often alluring to the management to have insolvency proceedings commenced against the business than to transfer it prior to insolvency.
The Danish Bankruptcy Council under the auspices of the Danish Ministry of Justice has issued a report on the revision of the rules on employees’ legal status during insolvency proceedings. If the proposed rules are implemented, this will give a wider scope for handling employees during a restructuring and transfer of insolvent businesses.
The legislative work based on the report has been suspended for an indefinite period.
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